The US equities marketplace is one of the most efficient and
liquid securities markets in the world. It is a product of
constantly evolving regulation and technological innovation.
However, this evolution has also generated certain unintended
consequences, including more complexity and fragmentation through
non-differentiated exchanges and increased reliance on
communication infrastructure.

The advent of automated trading has put an onus on market
participants "optimizing the geographic location of their
servers," according to the letter. It is all about speed and
computing power now, it said.

"These changes have effectively placed others with less
sophisticated infrastructure at a disadvantage," the letter said.

In particular, the bank takes issue with Rule 611, a part of
regulation NMS, designed to ensure best execution on
trades. In simple terms, Rule 611 is meant to stop an
investor buying a stock at $10 at one trading venue when it is
quoted at $9.99 at another.

The SEC Market Structure Advisory Committee addressed some of the
concerns
around Rule 611 in an April memo, including the contention
that the rule had contributed to greater fragmentation of
trading.

Goldman takes issue with the exchange-affiliated routing
broker-dealers, or the bits of the exchanges which route orders
to other trading venues. Here is the key passage (emphasis ours):

With the adoption of Regulation NMS, exchanges established
broker-dealer routing entities as a means to route to protected
markets in compliance with Rule 611. Since that time, these
exchange-affiliated routing broker-dealers have continued to
expand their service models, notwithstanding their regulatory
status as facilities of exchanges. As highlighted in various
letters filed by the Securities Industry and Financial Markets
Association ("SIFMA"), this regulatory disparity has led
to perceived conflicts of interest, blurring the distinction
between the public operations of exchanges and the operations of
their affiliated routing broker-dealers. For example,
we are concerned that exchange-affiliated routing
broker-dealers may have access to and use the proprietary market
data of the exchange to benefit their own order routers.
Consistent with the themes raised by the industry in the SIFMA
letters, we urge the Commission to undertake a review of
the structure and operations of exchanges to ensure that there
are adequate regulations enforcing the arms-length separation
between their operations as public exchanges and those as
non-public broker-dealers.

The letter has a couple of other interesting nuggets too. Here is
Goldman Sachs on high-speed trading (emphasis ours):

To be clear, we do not believe the speed of trading, in
isolation, is a problem. However, speed, coupled with US equity
market fragmentation of non-differentiated exchanges, has
resulted in an overly complicated marketplace. The US equities
markets are mature and move in sub-thousandths of seconds, which
forces firms like ours to invest in lower latency technology to
remain competitive. However, the value to investors from
this non-stop race for faster speeds may have reached a point of
diminishing marginal returns for market efficiency and
stability.

The letter also makes a number of recommendations to the SEC,
including mandating that public market data be disseminated to
all market participants simultaneously. Here is Goldman again:

Exchanges currently disseminate prices and transaction data to
the SEC-sanctioned distributor for all investors, but exchanges
may also send this information directly to private subscribers.
While the data leaves the exchange simultaneously, the public
stream is delayed because it goes through the intermediary's
processing infrastructure. The public aggregator should release
information to all market participants at the same time.